Court's decision could make Netflix more costly

SAN FRANCISCO -- Netflix may be exposed to higher costs in the wake of a major court decision that voided rules governing Internet access known as net neutrality.

On Tuesday, the U.S. Court of Appeals for the DC Circuit struck down FCC rules requiring Internet Service Providers, or ISPs, to be neutral in their restrictions on bandwidth. The move means ISPs will be allowed to charge content providers based on how much bandwidth they use, according to Michael Pachter, an analyst at Wedbush Securities.

"This ruling will impact those websites that transmit the most data, so sites that stream video content (particularly in high definition) will potentially feel the most significant impact," he added in a note to investors.

Netflix is the leading streaming video provider on the Internet and regularly accounts for a notable chunk of the data flowing across the web, so Wall Street expects the company to be exposed to extra costs from this ruling.

Netflix may face an incremental $75 million to $100 million in annual content delivery costs to cable companies for access to their residential customers who are streaming Netflix content, George Askew, an analyst at Stifel Nicolaus, estimated in a note to investors on Wednesday.

The ruling may also be an opportunity for Netflix. The company might be able to obtain preferential treatment by paying to ensure that its videos stream faster and in higher fidelity than competitors, Wedbush's Pachter noted.

However, it is more likely that profit-seeking ISPs will try to extract as much money as they can from websites like Netflix that use up a lot of bandwidth, the analyst added.

"It is most likely that ISPs would seek to extract a set fee per gigabyte (GB) of data transmitted; if we are right, the result would be more costly for Netflix than the status quo, with little or no incremental benefit," Pachter wrote.

"It is impossible to predict how this will play out in dollar terms, but directionally, it should mean higher payments by Netflix and/or higher payments by Netflix subscribers," he concluded.

Netflix spokesman Joris Evers declined to comment and referred to a statement from The Internet Association, a lobbying group for the industry that counts companies including Netflix, Amazon.com and Yahoo among its members.

"The Internet Association supports enforceable rules that ensure an open Internet, free from government control or discriminatory, anti-competitive actions by gatekeepers," Michael Beckerman, president of the group, said.

Richard Greenfield, an analyst at BTIG, said investors have been asking whether Netflix may be a good short trade if the company has to pay more to reach subscribers and how ISPs could penalize Google, which owns web video giant YouTube.

However, Greenfield argued that it would not make financial sense for ISPs like Time Warner Cable, Charter and Verizon to create paid fast-lanes and non-paying slow-lanes on the Internet.

The largest ISPs have been doing well selling more expensive, faster broadband Internet services to customers and one of the big drivers of this is the need for higher bandwidth to stream videos from Netflix and YouTube, Greenfield explained.

"If all of a sudden, an ISP said to Netflix 'pay us for access to our broadband customers or we will slow you down,' and Netflix refuses to pay, the ISP ends up hurting its own customers and discouraging those subscribers from using the service that is driving them to pay for faster broadband speed tiers in the first place," the analyst wrote in a note to investors Wednesday.